Deterring independent remanufacturers by strategic inventory

Abstract

In many industries independent remanufacturers (IRs) abound and their remanufactured products impose an external threat on the new products of original equipment manufacturers (OEMs). To cope with the threat, conventional wisdom suggests OEMs involve in the remanufacturing process. However, in reality there are still many OEMs who are unwilling to adopt the remanufacturing strategy worrying their own remanufactured products would cause an internal competition and cannibalise their new products. In this paper, we propose a new strategy for OEMs to deal with the dilemma. Specifically, we use a two-period model to show by building up strategic inventory in the first period, OEMs can successfully deter the entrance of IRs. The strategic inventory strategy works because it can be used as a commitment device to convey credible information that there will be enough new products in the second period and entering the market will be rendered unprofitable for IRs.